The “Bond Ladder” is an investment strategy that attempts to minimize risk and optimize cash flow. These portfolios do not offset the “Interest Rate Risk” because the value of the securities will decline when interest rates rise but the monthly income stays the same. The portfolio does not offset “Credit Risk” because of diversification the whole portfolio will not be destroyed.
Every year there will be bonds maturing. This creates the opportunity for reinvesting longer and always takes advantage of the best current rate. Bond Ladder Portfolios are not for every investor but because of the structure and concept it is one of the better philosophies of investing that has ever been imagined. Skilled investment advisors are familiar with this concept and can help with basic structure and reinvestments.
Here are some benefits:
- No management fees.
- Diversification of investments.
- Monthly income.
- Average maturity is normally at the optimum place in the yield curve.
- Can be tax free.
- A replacement for Mutual Funds that can be managed by you.
How it Works:
The investor takes an amount of cash and divides by 20 (amount of years the ladder runs) to compute the yearly amount of investments for 20 years. This can also be longer if investor needs higher income.
For example, an investor has $200,000 to invest and buys $10,000 worth of bonds a year for 20 years starting with maturities of 1 to 20 years. Once the portfolio is in place, the investor takes the maturity bonds proceeds and purchases a 20-year investment no matter what interest rates are doing. It is a simple process that creates a diversified portfolio that lets the investor have an investment system that will handle a lifetime of income.
This portfolio now has 20 different investments. If cash is needed, then the investor picks the shortest maturity for sale which means less risk. Higher income is generated with the longer maturities. Monthly income comes from all 20 different investments paying interest on different months. Bond laddered portfolios allows the investor to always buy new investments at the current interest rate levels. The portfolio will consist of many different ratings, names, maturities, and can be tax-free or taxable.
By Bill Mullally, President of Alamo Capital